I'm Picking Refiner Marathon Petroleum As One of the Few Stocks Likely to Beat on Earnings This Quarter

This refiner has a good chance to surpass expectations when it reports earnings on April 30, which is why MoneyShow's Jim Jubak is adding shares as of Thursday, April 9.

I don’t see a lot of situations where I’d be willing to put money on a company beating analyst expectations for first quarter earnings and raising guidance for the rest of 2015. Earnings and economic trends in the first half of the year don’t make the odds on that kind of good news especially favorable across the market.

Marathon Petroleum (MPC) is an exception, however. I think the refiner has a good chance to surpass expectations for earnings of $2.33 a share on revenue of $19.68 billion when it reports earnings on April 30.

Refining margins per barrel are likely to come in above the current $17 a barrel consensus and could be as high as $19 a barrel. The company’s Speedway retail unit’s recent acquisition of 1,256 retail outlets from Hess (HES) effectively doubles the number of Marathon’s retail outlets (and makes Speedway the largest US convenience store chain by revenue) and comes as low gasoline prices—down to a projected average of $2.45 a gallon from last summer’s $3.59, according to the US Energy Information Administration—are forecast to put more Americans on the road and to increase gasoline purchases by volume by 1.6%. Those extra gasoline purchases will put more people into Speedway’s convenience stores. In addition, the company will see lower maintenance costs (about $350 to $400 million) in 2015 thanks to a heavy maintenance program in 2014. And the company is on track to expand refinery volumes in 2015.

A little more detail on that last point: The company has two new condensate splitters adding to refining capacity in 2015. Condensate splitters are less costly refineries that take advantage of the easier to refine light oil coming out of the US oil shale production boom. In addition, the ability to relatively quickly run light crude through a splitter will increase Marathon’s export capacity since this lightly refined oil can be exported while unrefined crude can’t thanks to a 1970s ban on crude oil that remains in place. And finally, Marathon’s purchase of BP’s (BP) Texas City refinery shifts Marathon’s refinery profile toward the Gulf Coast and away from its past emphasis on mid-continent capacity just as the trend in US oil production makes the Gulf Coast the place to be. (The purchase will result in 62% of Marathon’s capacity coming from the Gulf Coast.)

All this is projected to lead to a huge increase in operating cash to $14.32 a share in 2015, Credit Suisse projects, from an actual $10.85 a share in 2014. It’s certainly not implausible to believe that the company will chose to return some of that cash flow to investors via share purchases or an increase in the current 2.01% dividend yield.

I’ll be adding Marathon Petroleum to my Jubak’s Picks portfolio tomorrow, April 9 with a target price of $125 a share. The shares closed at $98.56 today, April 8 with a gain of 0.32%. (Crude oil prices plunged today on a bigger than expected build in US crude inventories. US benchmark West Texas Intermediate fell 5.59% to $50.96 a barrel.) Marathon Petroleum shares trade at 12.99 times trailing 12-month earnings per share and 9.79 times projected 2015 earnings per share.